##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from  to
 Commission File No. 000-23277
 CITIZENS BANCORP/OR
  Oregon
(State of incorporation)
    
    91-1841688
(I.R.S. Employer
Identification No.)
 
    o þ
 o þ
 þ o
 þ
  o o þ
 o þ




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##### Table of Contents



INDEX
 PAGEDISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
    
    
    2PART I
    
    ITEM 1               BUSINESS
    
    
    2ITEM 1A              RISK FACTORS
    
    
    7ITEM 1B              UNRESOLVED STAFF COMMENTS
    
    
    8ITEM 2               PROPERTIES
    
    
    8ITEM 3               LEGAL PROCEEDINGS
    
    
    9ITEM 4               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    9PART IIITEM 5
              MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
    
    
    9ITEM 6               SELECTED FINANCIAL DATA
    
    
    12ITEM 7               MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 7A              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    27ITEM 8
              FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    30ITEM 9               CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    60ITEM 9A              CONTROLS AND PROCEDURES
    
    
    60ITEM 9B        OTHER INFORMATION
    
    
    60PART IIIITEM 10              DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    60ITEM 11              EXECUTIVE COMPENSATION AND REPORT OF COMMITTEES
    
    
    61ITEM 12              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED SHAREHOLDER MATTERS
    
    
    61ITEM 13              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    61ITEM 14              PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    61PART IVITEM 15              EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    62EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 1




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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
  
 PART I
 
 ITEM 1. BUSINESS
 General
       (Thousands)
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Net Income
    
    $
    5,327
    
    
    $
    4,352
    
    
    $
    5,012
    
    
    $
    4,858
    
    
    $
    4,028Return on Average Equity
    
    
    12.90
    %
    
    
    11.23
    %
    
    
    14.06
    %
    
    
    15.32
    %
    
    
    13.76
    %Return on Average Assets
    
    
    1.58
    %
    
    
    1.32
    %
    
    
    1.59
    %
    
    
    1.64
    %
    
    
    1.48
    %Average Equity to Average Assets
    
    
    12.26
    %
    
    
    11.58
    %
    
    
    11.32
    %
    
    
    10.73
    %
    
    
    10.74
    %Dividend Payout Ratio
    
    
    44.64
    %
    
    
    48.42
    %
    
    
    41.82
    %
    
    
    38.32
    %
    
    
    38.64
    %Total Loans (net)
    
    $
    230,547
    
    
    $
    210,951
    
    
    $
    185,053
    
    
    $
    178,333
    
    
    $
    171,196Total Deposits
    
    $
    254,083
    
    
    $
    235,482
    
    
    $
    235,759
    
    
    $
    227,363
    
    
    $
    231,821Total Assets
    
    $
    338,900
    
    
    $
    334,588
    
    
    $
    326,269
    
    
    $
    312,639
    
    
    $
    278,529Total Equity
    
    $
    42,296
    
    
    $
    38,401
    
    
    $
    35,617
    
    
    $
    32,330
    
    
    $
    29,524
  2




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Employees
  Competition
  2005 Activities
   3




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SUPERVISION AND REGULATION
 General
  Federal Bank Holding Company Regulation
 General
 Holding Company Bank Ownership
 Holding Company Control of Nonbanks
 Transactions with Affiliates
 Tying Arrangements
 Support of Subsidiary Banks State Law Restrictions
 Federal and State Regulation of Citizens Bank
 General
 Community Reinvestment
 Insider Credit Transactions
 4




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Regulation of Management
 Safety and Soundness Standards
 Interstate Banking And Branching
    Deposit Insurance
   Dividends
  Capital Adequacy
 Regulatory Capital Guidelines
 5




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Tier I and Tier II Capital
 Risk-based Capital Ratios
 Leverage Ratio
 Prompt Corrective Action
  Corporate Governance and Accounting Legislation
 Sarbanes-Oxley Act of 2002
   Anti-terrorism Legislation
 USA Patriot Act of 2001
 6




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Financial Services Modernization
 Gramm-Leach-Bliley Act of 1999
   Effects Of Government Monetary Policy
  Website Access to Reports
 www.citizensEbank.com
 
 ITEM 1A. RISK FACTORS
  Management of Growth
 Changes in Market Interest Rates.
 Geographic Factors
 7




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Competition.
 Credit Risk.
     Marketability of Common Stock.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
      8




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Main Office
    
    Junction City Office
    
    East Albany Office (1)275 SW Third Street
    
    955 Ivy Street
    
    2315 14th Ave. SECorvallis, Oregon
    
    Junction City, Oregon
    
    Albany, OregonCircle Office (2)
    
    Philomath Office
    
    West Albany Office (3)978 NW Circle Blvd.
    
    1224 Main Street
    
    2230 Pacific Blvd. SECorvallis, Oregon
    
    Philomath, Oregon
    
    Albany, OregonMcMinnville Office
    
    Harrisburg Office (4)
    
    Dallas Office455 NE Baker Street
    
    230 North 3rd Street
    
    583 SE JeffersonMcMinnville, Oregon
    
    Harrisburg, Oregon
    
    Dallas, OregonSpringfield Office (5)2073 Olympic StreetSuite 100Springfield, Oregon
 
 (1)
    
    Mennonite Home, satellite office of the East Albany Branch. This limited facility
is open to the large retirement/assisted living center for two hours Monday through
Friday. Lease renewed on March 1, 2004 for a three-year term.(2)
    
    Premises leased under an original lease agreement dated May 1, 1970 and a
supplemental lease agreement dated August 16, 1994. The lease expires January 31, 2020.(3)
    
    Ground lease under ground lease agreement dated May 29, 1998. The lease expires
in year 2048.(4)
    
    Premises leased under a lease agreement dated May 4, 2001. The lease expires May
4, 2006, with the right to renew for two additional periods of five years each.(5)
    
    Premises leased under a lease agreement dated June 1, 2003. The lease expires on
May 31, 2008 with the right to renew for two additional periods of three years each.
  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM
5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER
MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITES
   9




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High
    
    Low2001
    
    $
    14.50
    
    
    $
    9.752002
    
    $
    15.00
    
    
    $
    11.452003
    
    $
    18.50
    
    
    $
    12.492004
    
    $
    18.50
    
    
    $
    16.502005
    
    $
    20.00
    
    
    $
    16.00
   High
    
    Low2005First quarter
    
    $
    17.50
    
    
    $
    16.50Second quarter
    
    $
    18.00
    
    
    $
    16.00Third quarter
    
    $
    20.00
    
    
    $
    17.00Fourth quarter
    
    $
    19.45
    
    
    $
    17.952004First quarter
    
    $
    18.50
    
    
    $
    17.35Second quarter
    
    $
    17.50
    
    
    $
    17.00Third quarter
    
    $
    17.35
    
    
    $
    16.85Fourth quarter
    
    $
    18.50
    
    
    $
    16.50
  10




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EQUITY COMPENSATION PLAN INFORMATION
  Equity Compensation Plan Information
 # of Securities toBe Issued on
    
    
    
    
    
    # of Securities RemainingExercise of
    
    Weighted-Average
    
    Available for Future IssuanceOutstanding
    
    Exercise Price of
    
    Under Plan (ExcludingOptions
    
    Outstanding Options
    
    Securities in Column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity Compensation
Plans Approved by
Security Holders
    
    
    151,651
    
    
    $
    14.17
    
    
    
    49,078
    (1)Equity Compensation
Plans Not Approved
by Security Holders
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total
    
    
    151,651
    
    
    $
    14.17
    
    
    
    49,078
 
 (1)
    
    Includes 3,993 shares issuable under the 1998 incentive stock option plan and 45,085
shares issuable under the 1998 stock bonus plan.
 Citizens Bank/Bancorp, Common Equity Holding.
   Cash Dividend
    
    Stock Dividend2001
    
    $
    .34
    
    
    
    2002
    
    $
    .41
    
    
    
    2003
    
    $
    .46
    
    
    
    10
    %2004
    
    $
    .46
    
    
    
    2005
    
    $
    .50
    
    
    
    
  11




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ITEM 6. SELECTED FINANCIAL DATA
   % increase(decrease)Year ended December 31,
    
    2005
    
    2004
    
    2005 to 2004
    
    2003
    
    2002
    
    2001EARNINGSTotal interest income
    
    $
    18,468
    
    
    $
    15,341
    
    
    
    20.38
    %
    
    $
    16,312
    
    
    $
    17,575
    
    
    $
    18,755Total interest expense
    
    
    3,017
    
    
    
    1,667
    
    
    
    80.98
    %
    
    
    2,082
    
    
    
    3,322
    
    
    
    5,674Net interest income
    
    
    15,451
    
    
    
    13,674
    
    
    
    13.00
    %
    
    
    14,230
    
    
    
    14,253
    
    
    
    13,081Provision for credit losses
    
    
    155
    
    
    
    142
    
    
    
    9.15
    %
    
    
    270
    
    
    
    624
    
    
    
    733Net interest income after
provision for credit losses
    
    
    15,296
    
    
    
    13,532
    
    
    
    13.04
    %
    
    
    13,960
    
    
    
    13,629
    
    
    
    12,348Total non-interest income
    
    
    3,886
    
    
    
    4,428
    
    
    
    (12.24
    %)
    
    
    4,113
    
    
    
    3,773
    
    
    
    3,396Total non-interest expense
    
    
    11,154
    
    
    
    11,199
    
    
    
    (0.40
    %)
    
    
    10,203
    
    
    
    9,793
    
    
    
    9,181Income before taxes
    
    
    8,028
    
    
    
    6,761
    
    
    
    18.74
    %
    
    
    7,870
    
    
    
    7,609
    
    
    
    6,563Income taxes
    
    
    2,701
    
    
    
    2,409
    
    
    
    12.12
    %
    
    
    2,858
    
    
    
    2,751
    
    
    
    2,535Net income
    
    $
    5,327
    
    
    $
    4,352
    
    
    
    22.40
    %
    
    $
    5,012
    
    
    $
    4,858
    
    
    $
    4,028PER SHARE DATA (1)Net income basic
    
    $
    1.12
    
    
    $
    .94
    
    
    
    19.15
    %
    
    $
    1.10
    
    
    $
    1.07
    
    
    $
    .88Net income diluted
    
    
    1.11
    
    
    
    .94
    
    
    
    18.09
    %
    
    
    1.09
    
    
    
    1.07
    
    
    
    .88Cash dividends
    
    
    .50
    
    
    
    .46
    
    
    
    8.70
    %
    
    
    .46
    
    
    
    .41
    
    
    
    .34Book value
    
    
    9.06
    
    
    
    8.31
    
    
    
    9.03
    %
    
    
    7.82
    
    
    
    7.20
    
    
    
    6.54PERIOD END BALANCESTotal assets
    
    $
    338,900
    
    
    $
    334,588
    
    
    
    1.29
    %
    
    $
    326,269
    
    
    $
    312,639
    
    
    $
    278,529Net loans
    
    
    230,547
    
    
    
    210,951
    
    
    
    9.29
    %
    
    
    185,053
    
    
    
    178,333
    
    
    
    171,196Deposits
    
    
    254,083
    
    
    
    235,482
    
    
    
    7.90
    %
    
    
    235,759
    
    
    
    227,363
    
    
    
    231,821Repurchase agreements
    
    
    36,590
    
    
    
    55,446
    
    
    
    (34.01
    %)
    
    
    50,907
    
    
    
    48,059
    
    
    
    14,298Shareholders equity
    
    
    42,296
    
    
    
    38,401
    
    
    
    10.14
    %
    
    
    35,617
    
    
    
    32,330
    
    
    
    29,524PERFORMANCE RATIOSReturn on Average Assets
    
    
    1.58
    %
    
    
    1.32
    %
    
    
    
    
    
    
    1.59
    %
    
    
    1.64
    %
    
    
    1.48
    %Return on Average Equity
    
    
    12.90
    %
    
    
    11.23
    %
    
    
    
    
    
    
    14.06
    %
    
    
    15.32
    %
    
    
    13.76
    %Dividend Payout Ratio
    
    
    44.64
    %
    
    
    48.94
    %
    
    
    
    
    
    
    41.82
    %
    
    
    38.32
    %
    
    
    38.64
    %Average Equity to Average Assets
    
    
    12.26
    %
    
    
    11.75
    %
    
    
    
    
    
    
    11.32
    %
    
    
    10.73
    %
    
    
    10.74
    %Efficiency Ratio (2)
    
    
    56.70
    %
    
    
    60.88
    %
    
    
    
    
    
    
    54.92
    %
    
    
    53.63
    %
    
    
    55.03
    %
 
 (1)
    
    Per share amounts and the average number of shares outstanding have been restated for a stock dividend of 10% in 2003.(2)
    
    The efficiency ratio is computed by dividing total non-interest expenses by the total of net interest income and total non-interest income. Net interest income used in the
calculation includes tax equivalent adjustments (at the federal statutory rate of 34%) related to income on securities and loans that are exempt from federal taxes.
 12




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Critical Accounting Policies and Estimates
  Allowance for Credit Losses.
 Securities Available for Sale.
 Income Taxes.
 Results of Operations for Years Ended December 31, 2005, 2004, and 2003.
 Net Income.
    Interest Income
 13




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Interest Expense
 Net Interest Income
 14




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Average Balances and Tax-Equivalent Net Interest Margin2005
    
    
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    2003Year Ended December 31,
    
    Average
    
    Int. Income
    
    Avg. Rate
    
    Average
    
    Int. Income
    
    Avg. Rate
    
    Average
    
    Int. Income
    
    Avg. Rate(In thousands)
    
    Balance
    
    (Expense)
    
    Earned/ Paid
    
    Balance
    
    (Expense)
    
    Earned/ Paid
    
    Balance
    
    (Expense)
    
    Earned/ PaidASSETSLoans (1)(2)(4)
    
    $
    230,196
    
    
    $
    16,565
    
    
    
    7.20
    %
    
    $
    194,168
    
    
    $
    13,142
    
    
    
    6.77
    %
    
    $
    186,498
    
    
    $
    13,976
    
    
    
    7.49
    %Investment securities: (3)Taxable
    
    
    65,671
    
    
    
    1,622
    
    
    
    2.47
    %
    
    
    81,561
    
    
    
    1,665
    
    
    
    2.02
    %
    
    
    73,244
    
    
    
    1,728
    
    
    
    2.36
    %Tax-exempt (1)(5)
    
    
    9,067
    
    
    
    539
    
    
    
    5.94
    %
    
    
    11,890
    
    
    
    643
    
    
    
    5.41
    %
    
    
    11,484
    
    
    
    688
    
    
    
    6.00
    %Total Investment Securities
    
    
    74,738
    
    
    
    2,161
    
    
    
    2.89
    %
    
    
    93,451
    
    
    
    2,308
    
    
    
    2.45
    %
    
    
    84,728
    
    
    
    2,416
    
    
    
    2.85
    %Interest bearing deposits
in banks, federal funds
sold and other investments
    
    
    3,726
    
    
    
    79
    
    
    
    2.12
    %
    
    
    7,677
    
    
    
    117
    
    
    
    1.52
    %
    
    
    13,671
    
    
    
    154
    
    
    
    1.13
    %Total earning assets
    
    
    308,660
    
    
    
    18,805
    
    
    
    6.09
    %
    
    
    295,296
    
    
    
    15,567
    
    
    
    5.27
    %
    
    
    284,897
    
    
    
    16,546
    
    
    
    5.81
    %Cash and due from banks
    
    
    14,918
    
    
    
    
    
    
    
    
    
    
    
    21,095
    
    
    
    
    
    
    
    
    
    
    
    17,736Premises and
equipment  net
    
    
    7,416
    
    
    
    
    
    
    
    
    
    
    
    7,765
    
    
    
    
    
    
    
    
    
    
    
    6,760Other assets
    
    
    8,508
    
    
    
    
    
    
    
    
    
    
    
    8,429
    
    
    
    
    
    
    
    
    
    
    
    8,184Allowance for credit losses
    
    
    (2,753
    )
    
    
    
    
    
    
    
    
    
    
    (2,792
    )
    
    
    
    
    
    
    
    
    
    
    (2,687
    )Total
    
    $
    336,749
    
    
    
    
    
    
    
    
    
    
    $
    329,793
    
    
    
    
    
    
    
    
    
    
    $
    314,890LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Savings, MMDA, NOW
    
    $
    157,243
    
    
    
    (1,232
    )
    
    
    .78
    %
    
    $
    145,867
    
    
    
    (387
    )
    
    
    .27
    %
    
    $
    136,504
    
    
    
    (448
    )
    
    
    .33
    %Time
    
    
    38,630
    
    
    
    (779
    )
    
    
    2.02
    %
    
    
    45,606
    
    
    
    (577
    )
    
    
    1.27
    %
    
    
    51,842
    
    
    
    (926
    )
    
    
    1.79
    %Total interest-
Bearing deposits
    
    
    195,873
    
    
    
    (2,011
    )
    
    
    1.03
    %
    
    
    191,473
    
    
    
    (964
    )
    
    
    .50
    %
    
    
    188,346
    
    
    
    (1,374
    )
    
    
    .73
    %Repurchase agreements
    
    
    40,947
    
    
    
    (788
    )
    
    
    1.92
    %
    
    
    49,005
    
    
    
    (684
    )
    
    
    1.40
    %
    
    
    44,532
    
    
    
    (699
    )
    
    
    1.57
    %Other borrowings
    
    
    5,835
    
    
    
    (218
    )
    
    
    3.74
    %
    
    
    1,279
    
    
    
    (19
    )
    
    
    1.49
    %
    
    
    978
    
    
    
    (9
    )
    
    
    .92
    %Total interest-bearing
liabilities
    
    
    242,655
    
    
    
    (3,017
    )
    
    
    1.24
    %
    
    
    241,757
    
    
    
    (1,667
    )
    
    
    .69
    %
    
    
    233,856
    
    
    
    (2,082
    )
    
    
    .89
    %Demand deposits
    
    
    51,153
    
    
    
    
    
    
    
    
    
    
    
    48,060
    
    
    
    
    
    
    
    
    
    
    
    44,109Other liabilities
    
    
    1,649
    
    
    
    
    
    
    
    
    
    
    
    1,238
    
    
    
    
    
    
    
    
    
    
    
    1,274Shareholders equity
    
    
    41,292
    
    
    
    
    
    
    
    
    
    
    
    38,738
    
    
    
    
    
    
    
    
    
    
    
    35,651Total
    
    $
    336,749
    
    
    
    
    
    
    
    
    
    
    $
    329,793
    
    
    
    
    
    
    
    
    
    
    $
    314,890Net interest income (1)
    
    
    
    
    
    $
    15,788
    
    
    
    
    
    
    
    
    
    
    $
    13,900
    
    
    
    
    
    
    
    
    
    
    $
    14,464Interest income as a % of avg. earning assets
    
    
    
    
    
    
    
    
    
    
    6.09
    %
    
    
    
    
    
    
    
    
    
    
    5.27
    %
    
    
    
    
    
    
    
    
    
    
    5.81
    %Interest expense as a % of avg. earning assets
    
    
    
    
    
    
    
    
    
    
    .98
    %
    
    
    
    
    
    
    
    
    
    
    .56
    %
    
    
    
    
    
    
    
    
    
    
    .73
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.12
    %
    
    
    
    
    
    
    
    
    
    
    4.70
    %
    
    
    
    
    
    
    
    
    
    
    5.08
    %
 
 (1)
    
    Includes taxable equivalent adjustments related to income on securities and loans that are exempt from federal income taxes. The federal statutory rate was 34%.(2)
    
    For purposes of these calculations, nonaccrual loans are included in the average loan balance outstanding. Loan fees and late charges of $322, $373, and $697 are included in interest income for
2005, 2004 and 2003.(3)
    
    For purposes of computation of the average yield on investments available for sale, historical cost balances were utilized, therefore the yield information does not give effect to changes in fair
value that are reflected as a component of shareholders equity.(4)
    
    The non-tax effected average rate for loans for the periods ending December 31, 2005 and 2004 were 7.13% and 6.75%, respectively. There were no outstanding tax exempt loans for the period ending
December 31, 2003.(5)
    
    The non-tax effected average rate for tax-exempt securities for the periods ending December 31, 2005, 2004, and 2003 were 2.62%, 2.17%, and 2.37% respectively.
 15




---



##### Table of Contents



2005 versus 2004
    
    
    
    
    
    
    
    
    
    2004 versus 2003Increase (decrease)
    
    
    
    
    
    
    
    
    
    Increase (decrease)Due to change in
    
    
    
    
    
    
    
    
    
    Due to change inAverage
    
    Average
    
    Net
    
    Average
    
    Average
    
    Net(in thousands)
    
    Volume
    
    Rate
    
    Change
    
    Volume
    
    Rate
    
    ChangeINTEREST INCOMELoans
    
    $
    2,672
    
    
    $
    751
    
    
    $
    3,423
    
    
    $
    558
    
    
    $
    (1,392
    )
    
    $
    (834
    )Investment securities
    
    
    377
    
    
    
    (524
    )
    
    
    (147
    )
    
    
    332
    
    
    
    (440
    )
    
    
    (108
    )Interest-bearing deposits
in banks, Federal funds
sold, and other investments
    
    
    (74
    )
    
    
    36
    
    
    
    (38
    )
    
    
    (81
    )
    
    
    44
    
    
    
    (37
    )Total interest income
    
    
    2,975
    
    
    
    263
    
    
    
    3,238
    
    
    
    809
    
    
    
    (1,788
    )
    
    
    (979
    )INTEREST EXPENSENOW, MMDA & Savings deposits
    
    
    28
    
    
    
    817
    
    
    
    845
    
    
    
    29
    
    
    
    (90
    )
    
    
    (61
    )Time deposits
    
    
    (99
    )
    
    
    301
    
    
    
    202
    
    
    
    (134
    )
    
    
    (215
    )
    
    
    (349
    )Repurchase agreements
    
    
    (125
    )
    
    
    229
    
    
    
    104
    
    
    
    67
    
    
    
    (82
    )
    
    
    (15
    )Other borrowings
    
    
    140
    
    
    
    59
    
    
    
    199
    
    
    
    3
    
    
    
    7
    
    
    
    10Total interest expense
    
    
    (56
    )
    
    
    1,406
    
    
    
    1,350
    
    
    
    (35
    )
    
    
    (380
    )
    
    
    (415
    )Changes in net
Interest income
    
    $
    3,031
    
    
    $
    (1,143
    )
    
    $
    1,888
    
    
    $
    844
    
    
    $
    (1,408
    )
    
    $
    (564
    )
  Increase (Decrease) In Average Balance:
    
    
    
    
    
    Increase (Decrease) In Average Rate:Loans
    
    
    18.56
    %
    
    Loans
    
    
    6.32
    %Investments
    
    
    (20.02
    %)
    
    Investments
    
    
    17.07
    %Fed funds sold and deposits in banks
    
    
    (51.47
    %)
    
    Fed funds sold and deposits in banks
    
    
    39.12
    %Total Earning Assets
    
    
    4.53
    %
    
    Total Earning Assets
    
    
    15.57
    %NOW, MMDA, Savings
    
    
    7.80
    %
    
    NOW, MMDA, Savings
    
    
    195.31
    %Time
    
    
    (15.30
    %)
    
    Time
    
    
    59.39
    %Repurchase Agreements
    
    
    (16.44
    %)
    
    Repurchase Agreements
    
    
    37.88
    %Other Borrowings
    
    
    356.22
    %
    
    Other Borrowings
    
    
    151.50
    %Total Int Bear Liabilities
    
    
    .37
    %
    
    Total Int Bear Liabilities
    
    
    80.31
    %
  Increase (Decrease) In Average Balance:
    
    
    
    
    
    Increase (Decrease) In Average Rate:Loans
    
    
    4.11
    %
    
    Loans
    
    
    (9.67
    %)Investments
    
    
    10.30
    %
    
    Investments
    
    
    (13.95
    %)Fed funds sold and deposits in banks
    
    
    (43.84
    %)
    
    Fed funds sold and deposits in banks
    
    
    35.29
    %Total Earning Assets
    
    
    3.65
    %
    
    Total Earning Assets
    
    
    (9.31
    %)NOW, MMDA, Savings
    
    
    6.86
    %
    
    NOW, MMDA, Savings
    
    
    (19.16
    %)Time
    
    
    (12.03
    %)
    
    Time
    
    
    (29.05
    %)Repurchase Agreements
    
    
    10.04
    %
    
    Repurchase Agreements
    
    
    (11.08
    %)Other Borrowings
    
    
    30.78
    %
    
    Other Borrowings
    
    
    52.93
    %Total Int Bear Liabilities
    
    
    3.38
    %
    
    Total Int Bear Liabilities
    
    
    (22.55
    %)
 16




---



##### Table of Contents



Net Interest Income After Provision For Credit Losses.
 Non-Interest Income.
 Non-Interest Expense.
   Income Taxes.
 Asset/Liability Management
 Liquidity and Sources of Funds.
 17




---



##### Table of Contents



(Dollars in Thousands)2005
    
    2004
    
    2003Securities sold under agreement to repurchase:Average interest rateAt year end
    
    
    2.05
    %
    
    
    1.7
    %
    
    
    1.2
    %For the year
    
    
    1.9
    %
    
    
    1.4
    %
    
    
    1.6
    %Average amount outstanding
during the year
    
    $
    40,947
    
    
    $
    49,005
    
    
    $
    44,532Maximum amount outstanding at
any month end
    
    $
    56,015
    
    
    $
    55,446
    
    
    $
    50,907Amount outstanding at year end
    
    $
    36,590
    
    
    $
    55,446
    
    
    $
    50,907
   COST OF FUNDS2005
    
    2004
    
    20031.0%
    
    
    .7
    %
    
    
    .9
    %
  2005
    
    2004
    
    2003(In Thousands)
    
    Amount $
    
    Rate %
    
    Amount $
    
    Rate %
    
    Amount $
    
    Rate %DEPOSITSDemand
    
    $
    51,153
    
    
    
    
    
    
    $
    48,060
    
    
    
    
    
    
    $
    44,109
    
    
    
    Interest-bearing
demand
    
    $
    36,683
    
    
    
    .34
    %
    
    $
    36,565
    
    
    
    .16
    %
    
    $
    33,850
    
    
    
    .16
    %Savings/MMDA
    
    $
    120,560
    
    
    
    .92
    %
    
    $
    109,302
    
    
    
    .30
    %
    
    $
    102,654
    
    
    
    .38
    %Time
    
    $
    38,630
    
    
    
    2.02
    %
    
    $
    45,606
    
    
    
    1.27
    %
    
    $
    51,842
    
    
    
    1.79
    %Total
    
    $
    247,026
    
    
    
    
    
    
    $
    239,533
    
    
    
    
    
    
    $
    232,455
 18




---



##### Table of Contents



Maturity Period
    
    Certificates of Deposit(In Thousands)3 months or less
    
    $
    4,3543 months through 6 months
    
    
    4,3716 months through 12 months
    
    
    3,910Over 12 months
    
    
    2,499TOTAL
    
    $
    15,134
 Contractual Obligations
  Less than 1 Year
    
    1-3 Years
    
    3-5 Years
    
    More than 5 YearsOperating Leases (1-6)
    
    $
    1,760
    
    
    
    $
    131
    
    
    $
    218
    
    
    $
    149
    
    
    $
    1,262Certificates of Deposit
    
    $
    37,797
    
    
    
    $
    31,906
    
    
    $
    5,471
    
    
    $
    420
    
    
    
    Short-term Borrowings
    
    $
    38,468
    
    
    
    $
    38,468
    
    
    
    
    
    
    
    
    
    
    
    
 Operating Leases
 (1)
    
    Mennonite Home, satellite office of the East Albany Branch. This limited facility is open to
the large retirement/assisted living center for two hours Monday through Friday. Lease renewed
on March 1, 2004 for $396 per month. Lease is renewable every three years.(2)
    
    Circle Branch building lease commenced August 16, 1994 and expires January 31, 2020. Current
monthly lease is $2,928. Lease agreement has annual rent adjusted based on the United States
Bureau of Labor Statistics Consumer Price Index.(3)
    
    West Albany Branch land lease dated May 29, 1998 for a term of fifty years. On each fifth
annual anniversary date of the lease, rent is adjusted based on any increase in the Consumer
Price Index. At no time will the rent decrease from the initial stated rent of $1,850 per
month.(4)
    
    Harrisburg Branch building lease commenced May 4, 2001 for a five-year term with the option
to renew for two five-year terms. Monthly rent expense for the first two years is $846, year
three $896, year four $945, and year five $995.(5)
    
    Springfield Branch building lease dated June 1, 2003 for a term of five years, expiring May
31, 2008. Monthly lease is $3,730 per month.(6)
    
    Building leased for storage purposes. Lease commenced on February 1, 2004 and expires on July
31, 2010 with an option to renew for two additional terms of five years. The rent was $600 per
month until July 31, 2005 then increased to $1,500 per month and will increase annually based
upon the Consumer Price Index.
 Capital Resources.
    19




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##### Table of Contents



To be Well CapitalizedUnder PromptCapital Adequacy
    
    Corrective ActionActual
    
    
    
    
    
    Purposes
    
    
    
    
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioDecember 31, 2005Tier 1 capital (to average assets):Company
    
    $
    42,494
    
    
    
    12.39
    %
    
    $
    13,723
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    42,329
    
    
    
    12.37
    
    
    
    13,689
    
    
    
    4.00
    
    
    $
    17,111
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets):Company
    
    
    42,494
    
    
    
    15.57
    
    
    
    10,914
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    42,329
    
    
    
    15.56
    
    
    
    10,882
    
    
    
    4.00
    
    
    
    15,984
    
    
    
    6.00Total capital (to risk-weighted assets):Company
    
    
    45,244
    
    
    
    16.58
    
    
    
    21,828
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    45,079
    
    
    
    16.57
    
    
    
    21,764
    
    
    
    8.00
    
    
    
    26,460
    
    
    
    10.00December 31, 2004Tier 1 capital (to average assets):Company
    
    $
    38,745
    
    
    
    11.58
    %
    
    $
    13,382
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,650
    
    
    
    11.69
    
    
    
    13,220
    
    
    
    4.00
    
    
    $
    16,525
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets):Company
    
    
    38,745
    
    
    
    15.29
    
    
    
    10,138
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,650
    
    
    
    15.25
    
    
    
    10,138
    
    
    
    4.00
    
    
    
    15,207
    
    
    
    6.00Total capital (to risk-weighted assets):Company
    
    
    41,535
    
    
    
    16.39
    
    
    
    20,276
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    41,440
    
    
    
    16.35
    
    
    
    20,276
    
    
    
    8.00
    
    
    
    25,345
    
    
    
    10.00
 INVESTMENT PORTFOLIO
 Investment Activities.
  20




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##### Table of Contents



At December 31,2005
    
    
    2004
    
    
    2003Carrying
    
    
    Percent of
    
    
    Carrying
    
    
    Percent of
    
    
    Carrying
    
    
    Percent ofValue
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total(Dollars in thousands)Held-to-Maturity:State and municipal securities
    
    $
    7,871
    
    
    
    10.97
    %
    
    $
    9,956
    
    
    
    12.31
    %
    
    $
    11,931
    
    
    
    12.96
    %Availiable-for-Sale:U.S. Government agency securities
    
    $
    63,863
    
    
    
    89.03
    %
    
    $
    70,947
    
    
    
    87.69
    %
    
    $
    80,154
    
    
    
    87.04
    %Total Portfolio
    
    $
    71,734
    
    
    
    100
    %
    
    $
    80,903
    
    
    
    100
    %
    
    $
    92,085
    
    
    
    100
    %
  Less Than
    
    
    One to
    
    
    Five to
    
    
    OverOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Ten YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield*(Dollars in thousands)Held-to-Maturity:State and municipal securities
    
    $
    2,425
    
    
    
    3.40
    %
    
    $
    3,804
    
    
    
    4.43
    %
    
    $
    1,642
    
    
    
    4.37
    %
    
    
    
    
    
    
    Available-for-Sale:U.S. Government agency
securities
    
    $
    54,960
    
    
    
    3.19
    %
    
    $
    8,903
    
    
    
    5.93
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Portfolio
    
    $
    57,385
    
    
    
    3.20
    %
    
    $
    12,707
    
    
    
    5.48
    %
    
    $
    1,642
    
    
    
    4.37
    %
    
    
    
    
    
    
    
 
 *
    Yield information is computed using the effective yield on the security and does not give effect
to changes in fair value that are reflected as a component of shareholders equity.


Lending and Credit Management
     Concentrations within the Banks loan portfolio (includes funded and unfunded) are defined as: 
    
    Loans grouped by a common type of collateral, or product line, in excess of 150% of Banks tier 1 capital, or
    
    Loans grouped by regulatory reporting definitions in excess of 150% of Banks tier 1 capital, or
    
    Loans grouped by industry code (currently SIC codes) in excess of 150% of Banks tier 1 capital, or
 21




---



##### Table of Contents




    
    Loans of a speculative nature in excess of 100% of Banks tier 1 capital.
   
    
    Commercial loans, funded and unfunded, represent 16% of the banks portfolio and 107% of
tier one capital. These loans consist of operating lines of credit and non- real estate
fixed asset term loans.
    
    Agriculture loans, funded and unfunded, represents 11% of the banks portfolio and 75%
of tier one capital. These loans consist of operating loans and non-real estate fixed
asset term loans. In addition to these loans we have agriculture real estate loans that
represent 5 % of the banks portfolio and 33% of tier one capital. These loans are for
land purchases and in some cases to support operating loans.
    
    Residential real estate loans, funded and unfunded, represents 6% of the banks
portfolio and 42% of tier one capital. These loans include 1-4 family first deed of trust
and first mortgage loans to consumers.
    
    Consumer loans, funded and unfunded, represents 5% of the banks portfolio and 37% of
tier one capital. These loans are term loans and lines of credit for consumer purpose.
These loans also include home equity lines of credit.
    
    The banks largest concentration is in commercial real estate. These loans, funded and
unfunded, represents 56% of the banks loan portfolio and 382% of tier one capital. $76.4
million of these loans are owner occupied which represents 181.3% of tier one capital, and
$76.3 million are in non-owner occupied facilities which represent 181.1% of tier one
capital.
 
    
    Multi-family; which is all non-owner occupied, represents 11% of the commercial real
estate portfolio and 60% of tier one capital.
    
    RE lessor properties represents 14% of the commercial real estate portfolio and 80%
of tier one capital. Approximately 1/3 is owner occupied and 2/3 is non-owner occupied.
    
    Other real estate/finance represents 14% of the commercial real estate portfolio and
78% of tier one capital. Approximately 50% is owner occupied and non-owner occupied.
    
    Real estate to personal service properties represents 6% of the commercial real
estate portfolio and 33% of tier one capital. Approximately 2/3 is owner occupied and
1/3 is non-owner occupied.
    
    Real estate to professionals represents 5% of the commercial real estate portfolio
and 28% of tier one capital. Almost all of these properties are owner occupied.
    
    Manufacture, construction, agri-Business, transportation and wholesale properties
each represent less than 5% of the commercial real estate and less than 20% of tier one
capital. Majority of these loans are owner occupied.
  2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Type of Loan
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Commercial
    
    $
    22,478
    
    
    
    9.62
    %
    
    $
    21,141
    
    
    
    9.87
    %
    
    $
    21,765
    
    
    
    11.56
    %
    
    $
    21,377
    
    
    $
    11.79
    %
    
    $
    22,589
    
    
    
    12.99
    %Agriculture
    
    
    18,249
    
    
    
    7.81
    %
    
    
    19,508
    
    
    
    9.11
    %
    
    
    17,013
    
    
    
    9.04
    %
    
    
    16,196
    
    
    
    8.93
    %
    
    
    14,727
    
    
    
    8.47
    %Real EstateConstruction
    
    
    11,049
    
    
    
    4.73
    %
    
    
    8,200
    
    
    
    3.83
    %
    
    
    6,586
    
    
    
    3.50
    %
    
    
    15,474
    
    
    
    8.53
    %
    
    
    17,885
    
    
    
    10.28
    %1-4 Family
    
    
    22,787
    
    
    
    9.75
    %
    
    
    22,916
    
    
    
    10.70
    %
    
    
    26,292
    
    
    
    13.97
    %
    
    
    30,430
    
    
    
    16.78
    %
    
    
    29,667
    
    
    
    17.05
    %Multi-family
    
    
    25,419
    
    
    
    10.88
    %
    
    
    22,791
    
    
    
    10.64
    %
    
    
    10,398
    
    
    
    5.52
    %
    
    
    7,236
    
    
    
    3.99
    %
    
    
    10,373
    
    
    
    5.96
    %Commercial
    
    
    116,180
    
    
    
    49.70
    %
    
    
    102,623
    
    
    
    47.91
    %
    
    
    93,594
    
    
    
    49.72
    %
    
    
    82,202
    
    
    
    45.33
    %
    
    
    69,500
    
    
    
    39.95
    %Farmland
    
    
    14,046
    
    
    
    6.01
    %
    
    
    13,449
    
    
    
    6.28
    %
    
    
    9,068
    
    
    
    4.82
    %
    
    
    4,552
    
    
    
    2.51
    %
    
    
    5,151
    
    
    
    2.96
    %Consumer Loans
    
    
    3,502
    
    
    
    1.50
    %
    
    
    3,552
    
    
    
    1.66
    %
    
    
    3,523
    
    
    
    1.87
    %
    
    
    3,882
    
    
    
    2.14
    %
    
    
    4,061
    
    
    
    2.33
    %233,710
    
    
    
    100.00
    %
    
    
    214,180
    
    
    
    100.00
    %
    
    
    188,239
    
    
    
    100.00
    %
    
    
    181,349
    
    
    
    100.00
    %
    
    
    173,953
    
    
    
    100.00
    %Less Deferred fees
    
    
    (413
    )
    
    
    
    
    
    
    (439
    )
    
    
    
    
    
    
    (421
    )
    
    
    
    
    
    
    (470
    )
    
    
    
    
    
    
    (611
    )Less Allowance
    
    
    (2,750
    )
    
    
    
    
    
    
    (2,790
    )
    
    
    
    
    
    
    (2,765
    )
    
    
    
    
    
    
    (2,546
    )
    
    
    
    
    
    
    (2,146
    )$
    230,547
    
    
    
    
    
    
    $
    210,951
    
    
    
    
    
    
    $
    185,053
    
    
    
    
    
    
    $
    178,333
    
    
    
    
    
    
    $
    171,196
 22




---



##### Table of Contents



After 1 year,
    
    
    After 5 years,but before
    
    
    but beforeWithin 1 year
    
    
    5 years
    
    
    10 years
    
    
    After 10 years
    
    
    Total(In Thousands)Commercial
    
    $
    10,277
    
    
    $
    11,464
    
    
    $
    737
    
    
    $
    
    
    
    $
    22,478Agriculture
    
    
    13,476
    
    
    
    4,276
    
    
    
    497
    
    
    
    
    
    
    
    18,249Real EstateConstruction
    
    
    8,823
    
    
    
    2,226
    
    
    
    
    
    
    
    
    
    
    
    11,0491-4 Family
    
    
    3,746
    
    
    
    2,709
    
    
    
    3,320
    
    
    
    13,012
    
    
    
    22,787Multi-family
    
    
    6,693
    
    
    
    971
    
    
    
    8,436
    
    
    
    9,319
    
    
    
    25,419Commercial
    
    
    2,414
    
    
    
    7,793
    
    
    
    33,353
    
    
    
    72,620
    
    
    
    116,180Farmland
    
    
    4,134
    
    
    
    1,500
    
    
    
    1,337
    
    
    
    7,075
    
    
    
    14,046Consumer Loans
    
    
    646
    
    
    
    2,698
    
    
    
    122
    
    
    
    36
    
    
    
    3,502TOTAL
    
    $
    50,209
    
    
    $
    33,637
    
    
    $
    47,802
    
    
    $
    102,062
    
    
    $
    233,710
  Floating orFixed Rates
    
    
    Adjustable Rates
    
    
    Total(In Thousands)Commercial
    
    $
    8,942
    
    
    $
    3,259
    
    
    $
    12,201Agriculture
    
    
    1,975
    
    
    
    2,798
    
    
    
    4,773Real EstateConstruction
    
    
    481
    
    
    
    1,745
    
    
    
    2,2261-4 Family
    
    
    9,348
    
    
    
    9,693
    
    
    
    19,041Multi-family
    
    
    4,327
    
    
    
    14,399
    
    
    
    18,726Commercial
    
    
    26,987
    
    
    
    86,779
    
    
    
    113,766Farmland
    
    
    1,295
    
    
    
    8,617
    
    
    
    9,912Consumer Loans
    
    
    631
    
    
    
    2,225
    
    
    
    2,856TOTAL
    
    $
    53,986
    
    
    $
    129,515
    
    
    $
    183,501
 Credit Loss Allowance and Provision.
 
    
    The use of formulas for calculating the allowance
    
    Specific allowances for identified problem loans
    
    Subjective calculations
  
    
    Existing economic and business conditions effecting our market areas
    
    Loan growth and concentrations
    
    Credit quality trends
    
    Recent loss experience
 23




---



##### Table of Contents




    
    Specific industry conditions in particular segments of the portfolio
    
    Interest rate environment
    
    Duration of the current business cycle
    
    Bank regulatory examination results
    
    Internal and external loan examinations
         2005
    
    2004
    
    2003
    
    2002
    
    2001% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    LoansCommercial
    
    $
    279
    
    
    
    10
    %
    
    $
    275
    
    
    
    10
    %
    
    $
    320
    
    
    
    12
    %
    
    $
    299
    
    
    
    12
    %
    
    $
    279
    
    
    
    13
    %Agriculture
    
    
    227
    
    
    
    8
    %
    
    
    254
    
    
    
    9
    %
    
    
    250
    
    
    
    9
    %
    
    
    227
    
    
    
    9
    %
    
    
    172
    
    
    
    8
    %Real EstateConstruction
    
    
    138
    
    
    
    5
    %
    
    
    108
    
    
    
    4
    %
    
    
    96
    
    
    
    3
    %
    
    
    217
    
    
    
    9
    %
    
    
    215
    
    
    
    10
    %1-4 Family
    
    
    208
    
    
    
    9
    %
    
    
    236
    
    
    
    11
    %
    
    
    320
    
    
    
    12
    %
    
    
    325
    
    
    
    13
    %
    
    
    365
    
    
    
    17
    %Multifamily
    
    
    235
    
    
    
    11
    %
    
    
    297
    
    
    
    11
    %
    
    
    153
    
    
    
    5
    %
    
    
    101
    
    
    
    4
    %
    
    
    85
    
    
    
    4
    %Commercial
    
    
    1,446
    
    
    
    50
    %
    
    
    1338
    
    
    
    48
    %
    
    
    1,374
    
    
    
    50
    %
    
    
    1,158
    
    
    
    45
    %
    
    
    912
    
    
    
    42
    %Farmland
    
    
    175
    
    
    
    6
    %
    
    
    174
    
    
    
    6
    %
    
    
    133
    
    
    
    5
    %
    
    
    64
    
    
    
    2
    %
    
    
    54
    
    
    
    3
    %Consumer
    
    
    42
    
    
    
    1
    %
    
    
    108
    
    
    
    1
    %
    
    
    119
    
    
    
    4
    %
    
    
    155
    
    
    
    6
    %
    
    
    64
    
    
    
    3
    %$
    2,750
    
    
    
    100
    %
    
    $
    2,790
    
    
    
    100
    %
    
    $
    2,765
    
    
    
    100
    %
    
    $
    2,546
    
    
    
    100
    %
    
    $
    2,146
    
    
    
    100
    %
 24




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Loans on non-accrual status
    
    $
    2,073
    
    
    $
    6,190
    
    
    $
    2,164
    
    
    $
    130
    
    
    $
    703Accruing loans past due greater than 90 days
    
    
    122
    
    
    
    0
    
    
    
    12
    
    
    
    0
    
    
    
    330Total non-performing loans
    
    
    2,195
    
    
    
    6,190
    
    
    
    2,176
    
    
    
    130
    
    
    
    1,033Foreclosed real estate
    
    
    
    
    
    
    0
    
    
    
    476
    
    
    
    0
    
    
    
    0Total non-performing assets
    
    $
    2,195
    
    
    $
    6,190
    
    
    $
    2,652
    
    
    $
    130
    
    
    $
    1,033Allowance for credit losses
    
    $
    2,750
    
    
    $
    2,790
    
    
    $
    2,765
    
    
    $
    2,546
    
    
    $
    2,146Allowance for credit losses/non-performing
assets
    
    
    125
    %
    
    
    45
    %
    
    
    104
    %
    
    
    1,958
    %
    
    
    208
    %Non-performing loans/total loans
    
    
    .94
    %
    
    
    2.90
    %
    
    
    1.16
    %
    
    
    .07
    %
    
    
    .60
    %Non-performing assets/total assets
    
    
    .65
    %
    
    
    1.85
    %
    
    
    .81
    %
    
    
    .04
    %
    
    
    .37
    %
     25




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)Loss
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Doubtful
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Substandard
    
    $
    1,898
    
    
    $
    2,003
    
    
    $
    2,382
    
    
    $
    2,133
    
    
    $
    1,216Special mention
    
    $
    3,238
    
    
    $
    6,740
    
    
    $
    6,990
    
    
    $
    7,161
    
    
    $
    3,789Total
    
    $
    5,136
    
    
    $
    8,743
    
    
    $
    9,372
    
    
    $
    9,294
    
    
    $
    5,005Allowance for credit losses
    
    $
    2,750
    
    
    $
    2,790
    
    
    $
    2,765
    
    
    $
    2,546
    
    
    $
    2,146
    26




---



##### Table of Contents



2005
    
    2004
    
    2003
    
    2002
    
    2001(In Thousands)Allowance At Beginning of Period:
    
    $
    2,790
    
    
    $
    2,765
    
    
    $
    2,546
    
    
    $
    2,146
    
    
    $
    1,510Provision for Credit Losses
    
    
    155
    
    
    
    142
    
    
    
    270
    
    
    
    624
    
    
    
    733CHARGE-OFFS:Commercial
    
    
    94
    
    
    
    39
    
    
    
    15
    
    
    
    105
    
    
    
    41Agriculture
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Construction
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    01-4 Family
    
    
    97
    
    
    
    0
    
    
    
    22
    
    
    
    76
    
    
    
    31Multi-family
    
    
    0
    
    
    
    52
    
    
    
    0
    
    
    
    0
    
    
    
    0Commercial
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Farmland
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Consumer
    
    
    11
    
    
    
    26
    
    
    
    17
    
    
    
    56
    
    
    
    29Total Charge-Offs:
    
    $
    202
    
    
    $
    117
    
    
    $
    54
    
    
    $
    237
    
    
    $
    101RECOVERIES:Commercial
    
    
    7
    
    
    
    0
    
    
    
    1
    
    
    
    6
    
    
    
    2Agriculture
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Construction
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    01-4 Family
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    6
    
    
    
    0Multi-family
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Commercial
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Farmland
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Consumer
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    1
    
    
    
    2Total Recoveries
    
    $
    7
    
    
    $
    0
    
    
    $
    3
    
    
    $
    13
    
    
    $
    4Net Recoveries (Charge-Offs)
    
    
    <195>
    
    
    
    <117>
    
    
    
    <51>
    
    
    
    <224>
    
    
    
    <97>Balance At
End Of Period
    
    $
    2,750
    
    
    $
    2,790
    
    
    $
    2,765
    
    
    $
    2,546
    
    
    $
    2,146Ratio of Net Charge-Offs to Avg.
Loans Outstanding
    
    
    .08
    %
    
    
    .06
    %
    
    
    .03
    %
    
    
    .13
    %
    
    
    .06
    %
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Asset-Liability Management and Interest Rate Sensitivity
     27




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90 days
    
    
    1 year
    
    
    6 yearsWithin
    
    
    to
    
    
    to
    
    
    to
    
    
    Over 1590 days
    
    
    12 months
    
    
    5 years
    
    
    15 years
    
    
    Years
    
    
    TotalINTEREST EARNING ASSETSInterest Bearing Deposits
    
    $
    601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    601Loans
    
    
    57,845
    
    
    
    19,212
    
    
    
    79,191
    
    
    
    51,675
    
    
    
    22,624
    
    
    
    230,547Investments
    
    
    9,950
    
    
    
    47,435
    
    
    
    12,707
    
    
    
    1,642
    
    
    
    
    
    
    
    71,734TOTAL INTEREST EARNING ASSETS
    
    $
    68,396
    
    
    $
    66,647
    
    
    $
    91,898
    
    
    $
    53,317
    
    
    $
    22,624
    
    
    $
    302,882INTEREST BEARING LIABILITIESDemand Deposits
    
    $
    56,608
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    56,608NOW, Savings & Money Market Deposits
    
    
    159,678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,678Time Deposits
    
    
    13,658
    
    
    
    19,021
    
    
    
    5,118
    
    
    
    
    
    
    
    
    
    
    
    37,797REPOS
    
    
    36,590
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,590Other Borrowings
    
    
    1,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,878TOTAL INTEREST BEARING LIABILITIES
    
    $
    268,412
    
    
    $
    19,021
    
    
    $
    5,118
    
    
    $
    
    
    
    $
    
    
    
    $
    292,551$
    (200,016
    )
    
    $
    47,626
    
    
    $
    86,780
    
    
    $
    53,317
    
    
    $
    22,624
    
    
    $
    10,331CUMULATIVE INTEREST RATE SENSITIVITY GAP
    
    $
    (200,016
    )
    
    $
    (152,390
    )
    
    $
    (65,610
    )
    
    $
    (12,293
    )
    
    $
    10,331CUMMULATIVE GAP AS A PERCENT OF TOTAL EARNING ASSETS
    
    
    -66.04
    %
    
    
    -50.31
    %
    
    
    -21.66
    %
    
    
    -4.06
    %
    
    
    3.41
    %
   Net InterestChange in Interest Rates
    
    Income- 300 Basis points
    
    $
    (704
    )- 200 Basis points
    
    $
    (465
    )-100 Basis points
    
    $
    (231
    )+300 Basis points
    
    $
    292+200 Basis points
    
    $
    195+100 Basis points
    
    $
    97
 28




---



##### Table of Contents



29




---



##### Table of Contents



Contents
 Report of Independent Registered Public Accounting Firm
    
    
    31Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    32Consolidated Statements of Income
    
    
    33Consolidated Statements of Shareholders Equity
    
    
    34-35Consolidated Statements of Cash Flows
    
    
    36-37Notes to Consolidated Financial Statements
    
    
    38-59




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 Citizens Bancorp
 Citizens Bancorp and Subsidiary
  Citizens Bancorp and Subsidiary




---



##### Table of Contents



Consolidated Balance Sheets
 
 2005
    
    2004AssetsCash and due from banks
    
    $
    18,518
    
    
    $
    13,562Interest bearing deposits in banks
    
    
    166
    
    
    
    6,993Federal funds sold
    
    
    435
    
    
    
    5,787Securities available for sale
    
    
    63,863
    
    
    
    70,947Securities held to maturity (fair value $8,012 and $10,303)
    
    
    7,871
    
    
    
    9,956Federal Home Loan Bank stock, at cost
    
    
    905
    
    
    
    625Loans held for sale
    
    
    548
    
    
    
    Loans
    
    
    233,297
    
    
    
    213,741Allowance for credit losses
    
    
    2,750
    
    
    
    2,790Net loans
    
    
    230,547
    
    
    
    210,951Premises and equipment
    
    
    7,456
    
    
    
    7,604Accrued interest receivable
    
    
    1,852
    
    
    
    1,821Cash value of life insurance
    
    
    4,257
    
    
    
    4,101Other assets
    
    
    2,482
    
    
    
    2,241Total assets
    
    $
    338,900
    
    
    $
    334,588Liabilities and Shareholders EquityLiabilitiesDeposits:Demand, non-interest bearing
    
    $
    56,608
    
    
    $
    51,801Savings and interest-bearing demand
    
    
    159,678
    
    
    
    142,909Time
    
    
    37,797
    
    
    
    40,772Total deposits
    
    
    254,083
    
    
    
    235,482Short-term borrowings
    
    
    38,468
    
    
    
    57,159Accrued interest payable
    
    
    62
    
    
    
    34Other liabilities
    
    
    3,991
    
    
    
    3,512Total liabilities
    
    
    296,604
    
    
    
    296,187Commitments and Contingencies
    
    
    
    
    
    
    Shareholders EquityCommon stock (no par value); authorized 10,000,000 shares;
issued and outstanding: 2005 4,670,386 shares; 2004 4,620,250 shares
    
    
    28,938
    
    
    
    28,163Retained earnings
    
    
    13,606
    
    
    
    10,612Accumulated other comprehensive income (loss)
    
    
    (248
    )
    
    
    (374
    )Total shareholders equity
    
    
    42,296
    
    
    
    38,401Total liabilities and shareholders equity
    
    $
    338,900
    
    
    $
    334,588
 See notes to consolidated financial statements.
 32




---



##### Table of Contents



Consolidated Statements of Income
 
 2005
    
    2004
    
    2003Interest and Dividend IncomeLoans
    
    $
    16,411
    
    
    $
    13,142
    
    
    $
    13,976Federal funds sold and deposits in banks
    
    
    79
    
    
    
    117
    
    
    
    154Securities:Taxable
    
    
    1,622
    
    
    
    1,665
    
    
    
    1,728Tax-exempt
    
    
    356
    
    
    
    417
    
    
    
    454Total interest and dividend income
    
    
    18,468
    
    
    
    15,341
    
    
    
    16,312Interest ExpenseDeposits
    
    
    2,011
    
    
    
    964
    
    
    
    1,374Short-term borrowings
    
    
    1,006
    
    
    
    703
    
    
    
    708Total interest expense
    
    
    3,017
    
    
    
    1,667
    
    
    
    2,082Net interest income
    
    
    15,451
    
    
    
    13,674
    
    
    
    14,230Provision for Credit Losses
    
    
    155
    
    
    
    142
    
    
    
    270Net interest income after provision for credit losses
    
    
    15,296
    
    
    
    13,532
    
    
    
    13,960Non-Interest IncomeService charges on deposit accounts
    
    
    1,438
    
    
    
    1,707
    
    
    
    1,712Gains on sales of securities available for sale
    
    
    
    
    
    
    24
    
    
    
    177Earnings on life insurance policies
    
    
    156
    
    
    
    164
    
    
    
    168BankCard income
    
    
    1,715
    
    
    
    1,719
    
    
    
    1,489Mortgage department income
    
    
    96
    
    
    
    89
    
    
    
    230Gain on sale of assets
    
    
    92
    
    
    
    291
    
    
    
    0Other
    
    
    389
    
    
    
    434
    
    
    
    337Total non-interest income
    
    
    3,886
    
    
    
    4,428
    
    
    
    4,113Non-Interest ExpenseSalaries and employee benefits
    
    
    6,606
    
    
    
    6,435
    
    
    
    5,751Occupancy
    
    
    803
    
    
    
    854
    
    
    
    811Furniture and equipment
    
    
    590
    
    
    
    609
    
    
    
    645BankCard expense
    
    
    1,332
    
    
    
    1,378
    
    
    
    1,155Other
    
    
    1,823
    
    
    
    1,923
    
    
    
    1,841Total non-interest expense
    
    
    11,154
    
    
    
    11,199
    
    
    
    10,203Income before income taxes
    
    
    8,028
    
    
    
    6,761
    
    
    
    7,870Income Taxes
    
    
    2,701
    
    
    
    2,409
    
    
    
    2,858Net income
    
    $
    5,327
    
    
    $
    4,352
    
    
    $
    5,012Earnings Per ShareBasic
    
    $
    1.12
    
    
    $
    .94
    
    
    $
    1.10Diluted
    
    
    1.11
    
    
    
    .94
    
    
    
    1.09
 See notes to consolidated financial statements.
 33




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##### Table of Contents



Consolidated Statements of Shareholders Equity
  
 AccumulatedShares of
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    Common
    
    Retained
    
    ComprehensiveStock
    
    Stock
    
    Earnings
    
    Income (loss)
    
    TotalBalance at December 31, 2002
    
    
    4,084,210
    
    
    $
    19,459
    
    
    $
    12,498
    
    
    $
    373
    
    
    $
    32,330Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    5,012
    
    
    
    
    
    
    
    5,012Other comprehensive income,
net of tax:Change in fair value of
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (296
    )
    
    
    (296
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,716Cash dividend reinvestment
($12.18 per share)
    
    
    66,065
    
    
    
    804
    
    
    
    
    
    
    
    
    
    
    
    804Cash dividends declared
($.46 per share)
    
    
    
    
    
    
    
    
    
    
    (2,095
    )
    
    
    
    
    
    
    (2,095
    )Stock repurchased
    
    
    (12,536
    )
    
    
    (173
    )
    
    
    
    
    
    
    
    
    
    
    (173
    )Options exercised
    
    
    2,981
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    3510% stock dividend
    
    
    413,522
    
    
    
    7,030
    
    
    
    (7,030
    )
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    4,554,242
    
    
    
    27,155
    
    
    
    8,385
    
    
    
    77
    
    
    
    35,617Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    4,352
    
    
    
    
    
    
    
    4,352Other comprehensive income,
net of tax:Change in fair value of
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (451
    )
    
    
    (451
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,901Cash dividend reinvestment
($15.52 per share)
    
    
    61,727
    
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958Cash dividends declared
($.46 per share)
    
    
    
    
    
    
    
    
    
    
    (2,125
    )
    
    
    
    
    
    
    (2,125
    )Stock Options exercised
    
    
    4,091
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46Stock grants
    
    
    190
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Balance at December 31, 2004
    
    
    4,620,250
    
    
    $
    28,163
    
    
    $
    10,612
    
    
    $
    (374
    )
    
    $
    38,401
 (continued)
See notes to consolidated financial statements.
 34




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##### Table of Contents



Consolidated Statements of Shareholders Equity  (concluded)
 
 AccumulatedShares of
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    Common
    
    Retained
    
    ComprehensiveStock
    
    Stock
    
    Earnings
    
    Income (loss)
    
    TotalBalance at December 31, 2004
    
    
    4,620,250
    
    
    $
    28,163
    
    
    $
    10,612
    
    
    $
    (374
    )
    
    $
    38,401Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    5,327
    
    
    
    
    
    
    
    5,327Other comprehensive income,
net of tax:Change in fair value of
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    126Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,453Cash dividend reinvestment
($17.37 per share)
    
    
    31,614
    
    
    
    549
    
    
    
    
    
    
    
    
    
    
    
    549Cash dividends declared
($.50 per share)
    
    
    
    
    
    
    
    
    
    
    (2,333
    )
    
    
    
    
    
    
    (2,333
    )Options exercised
    
    
    18,432
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    211Stock grants
    
    
    90
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Income tax benefit from
stock options exercised
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    13Balance at December 31, 2005
    
    
    4,670,386
    
    
    $
    28,938
    
    
    $
    13,606
    
    
    $
    (248
    )
    
    $
    42,296
 See notes to consolidated financial statements.
 35




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##### Table of Contents



Consolidated Statements of Cash Flows
 
 2005
    
    
    2004
    
    
    2003Cash Flows from Operating ActivitiesNet income
    
    $
    5,327
    
    
    $
    4,352
    
    
    $
    5,012Adjustments to reconcile net income to net cash
provided by operating activities:Provision for credit losses
    
    
    155
    
    
    
    142
    
    
    
    270Depreciation and amortization
    
    
    498
    
    
    
    514
    
    
    
    508Originations of loans held for sale
    
    
    (11,971
    )
    
    
    (13,996
    )
    
    
    (39,683
    )Proceeds of loans held for sale
    
    
    11,533
    
    
    
    14,120
    
    
    
    40,020Gain on sales of loans
    
    
    (110
    )
    
    
    (124
    )
    
    
    (337
    )Deferred income tax (benefit)
    
    
    (93
    )
    
    
    100
    
    
    
    (95
    )Gains on sales of assets and securities available for sale
    
    
    (92
    )
    
    
    (24
    )
    
    
    (177
    )Gains on sales of foreclosed real estate
    
    
    
    
    
    
    50
    
    
    
    Gain on sale of branch
    
    
    
    
    
    
    (291
    )
    
    
    Earnings on life insurance policies
    
    
    (156
    )
    
    
    (164
    )
    
    
    (168
    )Stock dividends received
    
    
    (2
    )
    
    
    (16
    )
    
    
    (23
    )Net amortization of bond premium and discount
    
    
    84
    
    
    
    486
    
    
    
    593(Increase) decrease in interest receivable
    
    
    (31
    )
    
    
    63
    
    
    
    472Increase (decrease) in interest payable
    
    
    28
    
    
    
    (9
    )
    
    
    (51
    )Other  net
    
    
    54
    
    
    
    301
    
    
    
    293Net cash provided by operating activities
    
    
    5,224
    
    
    
    5,504
    
    
    
    6,634Cash Flows from Investing ActivitiesNet (increase) decrease in federal funds sold
    
    
    5,352
    
    
    
    (5,787
    )
    
    
    Net (increase) decrease in interest bearing deposits in banks
    
    
    6,827
    
    
    
    (4,812
    )
    
    
    14,653Activity in securities available for sale:Sales
    
    
    
    
    
    
    30,846
    
    
    
    9,193Maturities, prepayments and calls
    
    
    35,451
    
    
    
    46,900
    
    
    
    76,300Purchases
    
    
    (28,258
    )
    
    
    (69,735
    )
    
    
    (92,378
    )Activity in securities held to maturity:Maturities, prepayments and calls
    
    
    2,100
    
    
    
    2,420
    
    
    
    1,734Purchases
    
    
    
    
    
    
    (452
    )
    
    
    (2,621
    )Purchase of Federal Home Loan Bank stock
    
    
    (292
    )
    
    
    (212
    )
    
    
    Redemption of Federal Home Loan Bank stock
    
    
    14
    
    
    
    
    
    
    
    Increase in loans made to customers,
net of principal collections
    
    
    (19,743
    )
    
    
    (25,634
    )
    
    
    (7,417
    )Purchases of premises and equipment
    
    
    (436
    )
    
    
    (667
    )
    
    
    (2,030
    )Proceeds from sales of premises and equipment
    
    
    172
    
    
    
    6
    
    
    
    Net cash provided by (used in) investing activities
    
    
    1,187
    
    
    
    (27,127
    )
    
    
    (2,566
    )Cash Flows from Financing ActivitiesNet increase in deposits
    
    
    18,601
    
    
    
    33
    
    
    
    8,396Net increase (decrease) in short-term borrowings
    
    
    (18,691
    )
    
    
    5,444
    
    
    
    1,785Exercise of stock options
    
    
    211
    
    
    
    46
    
    
    
    35Cash dividends paid
    
    
    (1,576
    )
    
    
    (1,137
    )
    
    
    (1,034
    )Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (173
    )Net cash provided by (used in) financing activities
    
    
    (1,455
    )
    
    
    4,386
    
    
    
    9,009Net increase (decrease) in cash and due from banks
    
    
    4,956
    
    
    
    (17,237
    )
    
    
    13,077Cash and Due from BanksBeginning of year
    
    
    13,562
    
    
    
    30,799
    
    
    
    17,722End of year
    
    $
    18,518
    
    
    $
    13,562
    
    
    $
    30,799
 (continued)
 See notes to consolidated financial statements.
 36




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##### Table of Contents



Consolidated Statements of Cash Flows  (concluded)
 
 2005
    
    
    2004
    
    
    2003Supplemental Disclosures of Cash Flow InformationInterest paid
    
    $
    2,989
    
    
    $
    1,676
    
    
    $
    2,133Income taxes paid
    
    
    2,720
    
    
    
    2,385
    
    
    
    3,083Supplemental Disclosures of Non-Cash Investing
and Financing ActivitiesFair value adjustment of securities available for sale, net of tax
    
    $
    126
    
    
    ($
    451
    )
    
    ($
    296
    )Dividend reinvestment
    
    
    549
    
    
    
    958
    
    
    
    804Foreclosed real estate acquired in settlement of loans
    
    
    
    
    
    
    
    
    
    
    476Financed sale of foreclosed real estate
    
    
    
    
    
    
    394
    
    
    
    Stock grants
    
    
    2
    
    
    
    4
    
    
    
    
 See notes to consolidated financial statements.
 37




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 1  Summary of Significant Accounting Policies
 Principles of Consolidation
  Nature of Operations
  Consolidated Financial Statement Presentation
   Securities Available for Sale
  Securities Held to Maturity
   Federal Home Loan Bank Stock
  continued
 38




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 1  Summary of Significant Accounting Policies (continued)
 Loans Receivable
      Mortgage Banking Activities
   Foreclosed Real Estate
  (continued)
 39




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 1  Summary of Significant Accounting Policies (continued)
 Transfers of Financial Assets
  Premises and Equipment
   Income Taxes
  Cash Equivalents and Cash Flows
   Fair Value of Financial Instruments
  Cash and Interest Bearing Deposits in Banks
  Securities Available for Sale and Held to Maturity
  (continued)
 40




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 1  Summary of Significant Accounting Policies (continued)
 Fair Value of Financial Instruments (concluded)
 Federal Home Loan Bank Stock
  Loans
  Deposit
Liabilities
  Short-Term
Borrowings
  Accrued
Interest
  Off-Balance-Sheet
Instruments
  Earnings Per Share
  (continued)
 41




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 1  Summary of Significant Accounting Policies (concluded)
 Stock-Based Compensation
  2005
    
    2004
    
    2003(In thousands, except per share data)Net income, as reported
    
    $
    5,327
    
    
    $
    4,352
    
    
    $
    5,012Less total employee stock-based compensation expense determined
under fair value method for all qualifying awards, net of tax
    
    
    (129
    )
    
    
    (183
    )
    
    
    (134
    )Pro forma net income
    
    $
    5,198
    
    
    $
    4,169
    
    
    $
    4,878Earnings Per ShareBasic:As reported
    
    $
    1.12
    
    
    $
    .94
    
    
    $
    1.10Pro forma
    
    
    1.10
    
    
    
    .90
    
    
    
    1.07Diluted:As reported
    
    
    1.11
    
    
    
    .94
    
    
    
    1.09Pro forma
    
    
    1.09
    
    
    
    .90
    
    
    
    1.07
 Recent Accounting Pronouncements
  Estimated AdditionalCompensation ExpenseYear ended December 31,
    
    (In thousands)2006
    
    $
    622007
    
    
    252008
    
    
    5$
    92
 42




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##### Table of Contents



Notes
to Consolidated Financial Statements
 
 Note 2  Restricted Assets
  Note 3  Securities
  Gross
    
    
    GrossAmortized
    

    Unrealized
    
    
    Unrealized
    

    FairCost
    

    Gains
    
    
    Losses
    

    ValueSecurities Available for SaleDecember 31, 2005U.S. Government and agency securities
    
    $
    64,269
    
    
    $
    
    
    
    
    ($406
    )
    
    $
    63,863December 31, 2004U.S. Government and agency securities
    
    $
    71,560
    
    
    $
    
    
    
    
    ($613
    )
    
    
    70,947Securities Held to MaturityDecember 31, 2005State and municipal securities
    
    $
    7,871
    
    
    $
    146
    
    
    
    ($    5
    )
    
    $
    8,012December 31, 2004State and municipal securities
    
    $
    9,956
    
    
    $
    357
    
    
    
    ($  10
    )
    
    $
    10,303
  Less than 12 Months
    
    12 Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesDecember 31, 2005Securities held to maturity:State and municipal securities
    
    $
    
    
    
    $
    
    
    
    $
    677
    
    
    $
    (5
    )
    
    $
    677
    
    
    $
    (5
    )Securities available for sale:U.S. Government and agency securities
    
    $
    28,202
    
    
    $
    (70
    )
    
    $
    35,661
    
    
    $
    (336
    )
    
    $
    63,863
    
    
    $
    (406
    )December 31, 2004Securities held to maturity:State and municipal securities
    
    $
    1,404
    
    
    $
    (10
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,404
    
    
    $
    (10
    )Securities available for sale:U.S. Government and agency securities
    
    $
    70,947
    
    
    $
    (613
    )
    
    $
    
    
    
    $
    
    
    
    $
    70,947
    
    
    $
    (613
    )
  (continued)
 43




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 3
 Securities (concluded)
  Held to Maturity
    
    
    
    
    
    Available for SaleAmortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    ValueDue in one year or less
    
    $
    2,425
    
    
    $
    2,427
    
    
    $
    55,268
    
    
    $
    54,960Due from one year to five years
    
    
    3,804
    
    
    
    3,892
    
    
    
    9,001
    
    
    
    8,903Due from five to ten years
    
    
    1,642
    
    
    
    1,693
    
    
    
    
    
    
    
    Total
    
    $
    7,871
    
    
    $
    8,012
    
    
    $
    64,269
    
    
    $
    63,863
   Note 4  Loans
  2005
    
    2004Agriculture
    
    $
    18,249
    
    
    $
    21,141Commercial
    
    
    22,478
    
    
    
    19,508Real estate:Residential
1 - 4 family
    
    
    22,787
    
    
    
    22,916Construction
    
    
    11,049
    
    
    
    8,200Commercial
    
    
    116,180
    
    
    
    102,623Farmland
    
    
    14,046
    
    
    
    13,449Multi-family
    
    
    25,419
    
    
    
    22,791Consumer
    
    
    3,502
    
    
    
    3,552233,710
    
    
    
    214,180Less net deferred loan origination fees
    
    
    413
    
    
    
    439Total loans
    
    $
    233,297
    
    
    $
    213,741
 (continued)
 44




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 4  Loans (concluded)
  2005
    
    2004
    
    2003Balance at beginning of year
    
    $
    2,790
    
    
    $
    2,765
    
    
    $
    2,546Provision for credit losses
    
    
    155
    
    
    
    142
    
    
    
    270Charge-offs
    
    
    (202
    )
    
    
    (117
    )
    
    
    (54
    )Recoveries
    
    
    7
    
    
    
    
    
    
    
    3Net charge-offs
    
    
    (195
    )
    
    
    (117
    )
    
    
    (51
    )Balance at end of year
    
    $
    2,750
    
    
    $
    2,790
    
    
    $
    2,765
  2005
    
    2004
    
    2003December 31Impaired loans without a valuation allowance
    
    $
    666
    
    
    $
    4,906
    
    
    $
    1,636Impaired loans with a valuation allowance
    
    
    1,407
    
    
    
    1,284
    
    
    
    714Total impaired loans
    
    $
    2,073
    
    
    $
    6,190
    
    
    $
    2,350Valuation allowance related to impaired loans
    
    $
    101
    
    
    $
    206
    
    
    $
    226Years Ended December 31Average investment in impaired loans
    
    $
    1,908
    
    
    $
    3,525
    
    
    $
    1,679Interest income recognized on a cash basis on impaired loans
    
    
    
    
    
    
    
    
    
    
    
   45




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 5  Premises and Equipment
  2005
    
    2004Land and buildings
    
    $
    9,830
    
    
    $
    9,819Furniture and equipment
    
    
    2,563
    
    
    
    2,737Remodel in progress
    
    
    217
    
    
    
    12,611
    
    
    
    12,556Less accumulated depreciation and amortization
    
    
    5,155
    
    
    
    4,952Total premises and equipment
    
    $
    7,456
    
    
    $
    7,604
   2006
    
    $
    1312007
    
    
    1242008
    
    
    942009
    
    
    792010
    
    
    70Thereafter
    
    
    1,262Total minimum payments required
    
    $
    1,760
  Note 6  Deposits
  2005
    
    2004Demand deposits, non-interest bearing
    
    $
    56,608
    
    
    $
    51,801NOW and money market accounts
    
    
    144,302
    
    
    
    129,452Savings deposits
    
    
    15,376
    
    
    
    13,457Time certificates, $100,000 or more
    
    
    15,134
    
    
    
    16,467Other time certificates
    
    
    22,663
    
    
    
    24,305Total
    
    $
    254,083
    
    
    $
    235,482
  2006
    
    $
    31,9062007
    
    
    4,0852008
    
    
    1,3862009
    
    
    1322010
    
    
    288$
    37,797
 46




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 7  Short-Term Borrowings
  2005
    
    2004
    
    2003Average balance during the year
    
    $
    46,782
    
    
    $
    50,284
    
    
    $
    45,510Average interest rate during the year
    
    
    2.15
    %
    
    
    1.40
    %
    
    
    1.60
    %Maximum month-end balance during the year
    
    $
    57,112
    
    
    $
    57,159
    
    
    $
    51,715Balance at December 31:Securities sold under agreements to repurchase
    
    $
    36,590
    
    
    $
    55,446
    
    
    $
    50,907Other
    
    $
    1,878
    
    
    $
    1,713
    
    
    $
    808Weighted average interest rate at December 31
    
    
    1.92
    %
    
    
    2.16
    %
    
    
    .89
    %
 Note 8  Employee Benefits
   Note 9  Income Taxes
  2005
    
    2004
    
    2003Current:Federal
    
    $
    2,478
    
    
    $
    1,860
    
    
    $
    2,426State
    
    
    316
    
    
    
    449
    
    
    
    527Deferred tax expense (benefit)
    
    
    (93
    )
    
    
    100
    
    
    
    (95
    )Total income taxes
    
    $
    2,701
    
    
    $
    2,409
    
    
    $
    2,858
 (continued)
 47




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 9  Income Taxes (concluded)
  2005
    
    
    
    
    
    2004
    
    
    
    
    
    2003Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percentof Pre-tax
    
    
    
    
    
    of Pre-tax
    
    
    
    
    
    of Pre-taxAmount
    
    Income
    
    Amount
    
    Income
    
    Amount
    
    IncomeIncome tax at statutory rates
    
    $
    2,810
    
    
    
    35.0
    %
    
    $
    2,366
    
    
    
    35.0
    %
    
    $
    2,754
    
    
    
    35.0
    %Increase (decrease) resulting from:Tax-exempt income
    
    
    (222
    )
    
    
    (2.8
    )
    
    
    (161
    )
    
    
    (2.3
    )
    
    
    (154
    )
    
    
    (2.0
    )State income taxes, net of
federal income tax effect
    
    
    350
    
    
    
    4.4
    
    
    
    299
    
    
    
    4.4
    
    
    
    343
    
    
    
    4.4Earnings on life insurance policies
    
    
    (53
    )
    
    
    (.7
    )
    
    
    (56
    )
    
    
    (.8
    )
    
    
    (59
    )
    
    
    (.7
    )Other
    
    
    (184
    )
    
    
    (2.3
    )
    
    
    (39
    )
    
    
    (.5
    )
    
    
    (26
    )
    
    
    (.4
    )Total income tax expense
    
    $
    2,701
    
    
    
    33.6
    %
    
    $
    2,409
    
    
    
    35.8
    %
    
    $
    2,858
    
    
    
    36.3
    %
  2005
    
    2004Deferred Tax AssetsAllowance for credit losses
    
    $
    1,017
    
    
    $
    1,008Deferred compensation
    
    
    322
    
    
    
    188Other
    
    
    135
    
    
    
    147Unrealized loss on securities available for sale
    
    
    158
    
    
    
    240Total deferred tax assets
    
    
    1,632
    
    
    
    1,583Deferred Tax LiabilitiesAccumulated depreciation
    
    
    (161
    )
    
    
    (180
    )Deferred income
    
    
    (177
    )
    
    
    (200
    )Other
    
    
    (140
    )
    
    
    (60
    )Total deferred tax liabilities
    
    
    (478
    )
    
    
    (440
    )Net deferred tax assets
    
    $
    1,154
    
    
    $
    1,143
  48




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Notes to Consolidated Financial Statements
 
 Note 10  Commitments and Contingencies
   2005
    
    2004Commitments to extend credit:Real estate secured
    
    $
    9,489
    
    
    $
    9,033Other
    
    
    49,064
    
    
    
    35,461Total commitments to extend credit
    
    $
    58,553
    
    
    $
    44,494Standby letters of credit
    
    $
    3,472
    
    
    $
    2,214
      49




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Notes to Consolidated Financial Statements
 
 Note 11  Significant Concentrations of Credit Risk
     Note 12  Cash Dividend Reinvestment Plan
  Note 13  Stock Based Compensation
 Employee Stock Option Plan
   2004
    
    2003Dividend yield
    
    2.66%
    
    2.55%Expected life
    
    10 years
    
    10 yearsRisk-free interest rate
    
    4.17%
    
    4.21%Expected volatility
    
    24%
    
    24%
  (continued)
 50




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 13  Stock Based Compensation (concluded)
 Employee Stock Option Plan (concluded)
  2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003Weighted
    
    
    
    
    

    Weighted
    
    
    
    
    

    WeightedAverage
    
    
    
    
    

    Average
    
    
    
    
    

    AverageExercise
    
    
    
    
    

    Exercise
    
    
    
    
    

    ExerciseShares
    

    Price
    
    
    Shares
    

    Price
    
    
    Shares
    

    PriceOutstanding at beginning of year
    
    
    172,541
    
    
    $
    14.11
    
    
    
    161,299
    
    
    $
    13.43
    
    
    
    124,824
    
    
    $
    11.77Granted
    
    
    
    
    
    
    
    
    
    
    23,007
    
    
    
    17.00
    
    
    
    42,875
    
    
    
    17.95Forfeited
    
    
    (2,458
    )
    
    
    14.26
    
    
    
    (7,674
    )
    
    
    14.12
    
    
    
    (3,245
    )
    
    
    11.73Exercised
    
    
    (18,432
    )
    
    
    11.44
    
    
    
    (4,091
    )
    
    
    11.31
    
    
    
    (3,155
    )
    
    
    11.06Outstanding at end of year
    
    
    151,651
    
    
    $
    14.17
    
    
    
    172,541
    
    
    $
    14.11
    
    
    
    161,299
    
    
    $
    13.43Options exercisable at year-end
    
    
    108,300
    
    
    $
    13.32
    
    
    
    92,267
    
    
    $
    12.43
    
    
    
    62,930
    
    
    $
    11.72
  WeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    Number
    
    Contractual
    
    Exercise
    
    
    Number
    
    ExercisePrices
    
    
    Outstanding
    Life (Years)
    
    Price
    
    
    Exercisable
    
    Price$10.45 - $12.22
    
    
    59,072
    
    
    
    5.78
    
    
    $
    11.27
    
    
    
    50,718
    
    
    $
    11.25$13.18
    
    
    36,867
    
    
    
    6.14
    
    
    
    13.18
    
    
    
    34,668
    
    
    
    13.18$16.70 - $18.50
    
    
    55,712
    
    
    
    8.31
    
    
    
    17.90
    
    
    
    22,914
    
    
    
    18.12151,651
    
    
    
    
    
    
    
    
    
    
    
    108,300
 Stock Bonus Plan
  51




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Notes to Consolidated Financial Statements
 
 Note 14  Supplemental Executive Retirement Plan
   Note 15  Stock Purchase Plan
  Note 16  Regulatory Matters
    (continued)
 52




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Notes to Consolidated Financial Statements
 
 Note 16  Regulatory Matters (concluded)
  To be Well CapitalizedUnder PromptCapital Adequacy
    
    Corrective ActionActual
    
    
    
    
    
    Purposes
    
    
    
    
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioDecember 31, 2005Tier 1 capital (to average assets):Company
    
    $
    42,494
    
    
    
    12.39
    %
    
    $
    13,723
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    42,329
    
    
    
    12.37
    
    
    
    13,689
    
    
    
    4.00
    
    
    $
    17,111
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets):Company
    
    
    42,494
    
    
    
    15.57
    
    
    
    10,914
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    42,329
    
    
    
    15.56
    
    
    
    10,882
    
    
    
    4.00
    
    
    
    15,984
    
    
    
    6.00Total capital (to risk-weighted assets):Company
    
    
    45,244
    
    
    
    16.58
    
    
    
    21,828
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    45,079
    
    
    
    16.57
    
    
    
    21,764
    
    
    
    8.00
    
    
    
    26,640
    
    
    
    10.00December 31, 2004Tier 1 capital (to average assets):Company
    
    $
    38,745
    
    
    
    11.58
    %
    
    $
    13,382
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,650
    
    
    
    11.69
    
    
    
    13,220
    
    
    
    4.00
    
    
    $
    16,525
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets):Company
    
    
    38,745
    
    
    
    15.29
    
    
    
    10,138
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,650
    
    
    
    15.25
    
    
    
    10,138
    
    
    
    4.00
    
    
    
    15,207
    
    
    
    6.00Total capital (to risk-weighted assets):Company
    
    
    41,535
    
    
    
    16.39
    
    
    
    20,276
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    41,440
    
    
    
    16.35
    
    
    
    20,276
    
    
    
    8.00
    
    
    
    25,345
    
    
    
    10.00
 Restrictions on Retained Earnings
  53




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Notes to Consolidated Financial Statements
 
 Note 17  Condensed Financial Information  Parent Company Only
 Condensed Balance Sheets  December 31
 2005
    
    2004AssetsCash
    
    $
    2,548
    
    
    $
    2,289Investment in Bank
    
    
    42,081
    
    
    
    38,237Total assets
    
    $
    44,629
    
    
    $
    40,526Liabilities and Shareholders EquityLiabilitiesDividends payable
    
    $
    2,333
    
    
    $
    2,125Shareholders Equity
    
    
    42,296
    
    
    
    38,401Total liabilities and shareholders equity
    
    $
    44,629
    
    
    $
    40,526
 Condensed Statements of Income  Years Ended December 31
 2005
    
    2004
    
    2003IncomeDividend income from Bank
    
    $
    2,489
    
    
    $
    2,329
    
    
    $
    2,145ExpensesAmortization and other expense
    
    
    165
    
    
    
    143
    
    
    
    112Income before income tax benefit
    
    
    2,324
    
    
    
    2,186
    
    
    
    2,033Income Tax Benefit
    
    
    60
    
    
    
    54
    
    
    
    43Income before equity in undistributed
income of subsidiary
    
    
    2,384
    
    
    
    2,240
    
    
    
    2,076Equity in Undistributed Income of Subsidiary
    
    
    2,943
    
    
    
    2,112
    
    
    
    2,936Net income
    
    $
    5,327
    
    
    $
    4,352
    
    
    $
    5,012
 (continued)
 54




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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 17  Condensed Financial Information  Parent Company Only (concluded)
 Condensed Statements of Cash Flows  Years Ended December 31
 2005
    
    2004
    
    2003Cash Flows from Operating ActivitiesNet income
    
    $
    5,327
    
    
    $
    4,352
    
    
    
    5,012Adjustments to reconcile net income to net cash
provided by operating activities:Equity in undistributed income of subsidiary
    
    
    (2,943
    )
    
    
    (2,112
    )
    
    
    (2,936
    )Other  net
    
    
    15
    
    
    
    4
    
    
    
    56Net cash provided by operating activities
    
    
    2,399
    
    
    
    2,244
    
    
    
    2,132Cash Flows from Investing ActivitiesInvestment in Bank
    
    
    (775
    )
    
    
    (1,008
    )
    
    
    (666
    )Cash Flows from Financing ActivitiesCash dividends paid
    
    
    (1,576
    )
    
    
    (1,137
    )
    
    
    (1,034
    )Exercise of stock options
    
    
    211
    
    
    
    46
    
    
    
    35Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (173
    )Net cash used in financing activities
    
    
    (1,365
    )
    
    
    (1,091
    )
    
    
    (1,172
    )Net increase in cash
    
    
    259
    
    
    
    145
    
    
    
    294CashBeginning of year
    
    
    2,289
    
    
    
    2,144
    
    
    
    1,850End of year
    
    $
    2,548
    
    
    $
    2,289
    
    
    $
    2,144
 Note 18  Stock Dividend
  55




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Notes to Consolidated Financial Statements
 
 Note 19  Fair Value of Financial Instruments
  2005
    
    
    
    
    
    2004Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial AssetsCash and due from banks, interest
bearing deposits in banks
    
    $
    18,684
    
    
    $
    18,684
    
    
    $
    20,555
    
    
    $
    20,555Federal funds sold
    
    
    435
    
    
    
    435
    
    
    
    5,787
    
    
    
    5,787Securities available for sale
    
    
    63,863
    
    
    
    63,863
    
    
    
    70,947
    
    
    
    70,947Securities held to maturity
    
    
    7,871
    
    
    
    8,012
    
    
    
    9,956
    
    
    
    10,303Federal Home Loan Bank stock
    
    
    905
    
    
    
    905
    
    
    
    625
    
    
    
    625Loans held for sale
    
    
    548
    
    
    
    548
    
    
    
    
    
    
    
    Loans receivable, net
    
    
    230,547
    
    
    
    233,044
    
    
    
    210,951
    
    
    
    213,879Accrued interest receivable
    
    
    1,852
    
    
    
    1,852
    
    
    
    4,101
    
    
    
    4,101Financial LiabilitiesDeposits
    
    $
    254,083
    
    
    $
    251,948
    
    
    $
    235,482
    
    
    $
    234,084Short-term borrowings
    
    
    38,468
    
    
    
    38,516
    
    
    
    57,159
    
    
    
    57,159Accrued interest payable
    
    
    62
    
    
    
    62
    
    
    
    34
    
    
    
    34
  56




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Notes to Consolidated Financial Statements
 
 Note 20  Comprehensive Income
  Before-Tax
    
    Tax
    
    Net-of-TaxAmount
    
    Expense
    
    Amount2005Unrealized holding gains arising during the year
    
    $
    208
    
    
    $
    82
    
    
    $
    1262004Unrealized holding losses arising during the year
    
    
    ($715
    )
    
    $
    279
    
    
    
    ($436
    )Less reclassification adjustments for gains realized
in net income
    
    
    (24
    )
    
    
    9
    
    
    
    (15
    )Net unrealized losses
    
    
    ($739
    )
    
    $
    288
    
    
    
    ($451
    )2003Unrealized holding losses arising during the year
    
    
    ($309
    )
    
    $
    120
    
    
    
    ($189
    )Less reclassification adjustments for gains realized
in net income
    
    
    (177
    )
    
    
    70
    
    
    
    (107
    )Net unrealized losses
    
    
    ($486
    )
    
    $
    190
    
    
    
    ($296
    )
 Note 21  Earnings Per Share Disclosures
  Net Income
    
    
    Shares

    Per Share(Numerator)
    
    
    (Denominator)

    AmountYear Ended December 31, 2005Basic earnings per share:
    
    $
    5,327
    
    
    
    4,743,361

    
    $
    1.12Effect of dilutive securities:
    
    
    
    
    
    
    37,155

    
    
    (.01
    )Diluted earnings per share:
    
    $
    5,327
    
    
    
    4,780,516

    
    $
    1.11
 (continued)
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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 21  Earnings Per Share Disclosures (concluded)
 Net Income
    

    
    Shares

    Per Share(Numerator)
    
    
    (Denominator)

    AmountYear Ended December 31, 2004Basic earnings per share:
    
    $
    4,352
    
    
    
    4,616,799
    
    
    $
    .94Effect of dilutive securities:
    
    
    
    
    
    
    36,034
    
    
    
    Diluted earnings per share:
    
    $
    4,352
    
    
    
    4,652,833
    
    
    $
    .94Year Ended December 31, 2003Basic earnings per share:
    
    $
    5,012
    
    
    
    4,556,474
    
    
    $
    1.10Effect of dilutive securities:
    
    
    
    
    
    
    25,690
    
    
    
    (.01
    )Diluted earnings per share:
    
    $
    5,012
    
    
    
    4,582,164
    
    
    $
    1.09
 Note 22  Quarterly Data (Unaudited)
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterYear Ended December 31, 2005Interest income
    
    $
    4,345
    
    
    $
    4,452
    
    
    $
    4,737
    
    
    $
    4,934Interest expense
    
    
    (588
    )
    
    
    (715
    )
    
    
    (824
    )
    
    
    (890
    )Net interest income
    
    
    3,757
    
    
    
    3,737
    
    
    
    3,913
    
    
    
    4,044Provision for credit losses
    
    
    (33
    )
    
    
    (34
    )
    
    
    (41
    )
    
    
    (47
    )Noninterest income
    
    
    1,064
    
    
    
    1,015
    
    
    
    1,055
    
    
    
    752Noninterest expenses
    
    
    (2,760
    )
    
    
    (2,823
    )
    
    
    (2,850
    )
    
    
    (2,721
    )Income before income taxes
    
    
    2,028
    
    
    
    1,895
    
    
    
    2,077
    
    
    
    2,028Income taxes
    
    
    (700
    )
    
    
    (615
    )
    
    
    (701
    )
    
    
    (685
    )Net income
    
    $
    1,328
    
    
    $
    1,280
    
    
    $
    1,376
    
    
    $
    1,343Earnings Per Common ShareBasic
    
    $
    .29
    
    
    $
    .27
    
    
    $
    .29
    
    
    $
    .27Diluted
    
    
    .28
    
    
    
    .27
    
    
    
    .29
    
    
    
    .27
 (continued)
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##### Table of Contents



Notes to Consolidated Financial Statements
 
 Note 22  Quarterly Data (Unaudited) (concluded)
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterYear Ended December 31, 2004Interest income
    
    $
    3,705
    
    
    $
    3,822
    
    
    $
    3,917
    
    
    $
    3,887Interest expense
    
    
    (395
    )
    
    
    (373
    )
    
    
    (405
    )
    
    
    (494
    )Net interest income
    
    
    3,310
    
    
    
    3,459
    
    
    
    3,512
    
    
    
    3,393Provision for credit losses
    
    
    (44
    )
    
    
    (33
    )
    
    
    (32
    )
    
    
    (33
    )Noninterest income
    
    
    1,026
    
    
    
    1,076
    
    
    
    1,359
    
    
    
    967Noninterest expenses
    
    
    (2,745
    )
    
    
    (2,741
    )
    
    
    (2,789
    )
    
    
    (2,924
    )Income before income taxes
    
    
    1,547
    
    
    
    1,761
    
    
    
    2,050
    
    
    
    1,403Income taxes
    
    
    (531
    )
    
    
    (659
    )
    
    
    (738
    )
    
    
    (481
    )Net income
    
    $
    1,016
    
    
    $
    1,102
    
    
    $
    1,312
    
    
    $
    922Earnings Per Common ShareBasic
    
    $
    .22
    
    
    $
    .24
    
    
    $
    .28
    
    
    $
    .20Diluted
    
    
    .22
    
    
    
    .24
    
    
    
    .28
    
    
    
    .20
 Note
23  Subsequent Event
  59




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
  
 ITEM 9A. CONTROLS AND PROCEDURES
    
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT
   Code of Ethics
 www.citizensEbank.com
 
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ITEM 11. EXECUTIVE COMPENSATION AND REPORT OF COMMITTEES
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT, AND RELATED SHAREHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)(1) Financial Statements
  (a)(2) Financial Statement Schedules
  (a)(3) Exhibit Index
 Exhibit No.
    
    Exhibit3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Bylaws (2)10.1
    
    Incentive Stock Option Plan (1)10.2
    
    Stock Bonus Plan (1)10.3
    
    Dividend Reinvestment Plan (3)10.4
    
    Deferred Compensation Plan for William V. Humphreys, Sr. (3)10.5
    
    Executive Supplemental Compensation Agreement and Life
Insurance Endorsement Method Split Dollar Plan Agreement for
William V. Humphreys, Sr.10.6
    
    Form of Executive Supplemental Compensation Agreement and Life
Insurance Endorsement Method Split Dollar Plan Agreement for
William F. Hubel, Steve R. Terjeson, Lark E. Wysham and Scott
M. Zimbrick14
    
    Code of Ethics (4)21
    
    Subsidiaries, Citizens Bank is the only subsidiary23
    
    Consent of McGladrey & Pullen PLLP31.1
    
    Certificate of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 200232.1
    
    Chief Executive Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to exhibit 3.1, 10.1 and 10.2 of the Companys Annual Report on
Form 10-K for the fiscal year December 21, 2004(2)
    
    Incorporated by reference to exhibit 3.2 of the Companys Annual Report on Form 10-K for the
fiscal year December 21, 2002(3)
    
    Incorporated by reference to exhibits 10.1 and 10.3 of the Companys Annual Report on Form
10-K for the fiscal year December 21, 1997(4)
    
    Incorporated by reference to exhibit 14 of the Companys Annual Report on Form 10-K for the
fiscal year December 21, 2003
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st
 
 By:
    
    /s/ William V. Humphreys, Sr.William V. Humphreys, Sr.President and Chief Executive Officer
  st
  /s/ William V. Humphreys, Sr.William V. Humphreys, Sr., President & CEO
  /s/ Lark E. WyshamLark E. Wysham, Executive Vice President & Chief Financial Officer
  /s/ Jock Gibson
    
    /s/ William V. Humphreys, Sr.Jock Gibson
    
    William V. Humphreys, Sr./s/ Rosetta C. Venell
    
    /s/ James E. RichardsRosetta C. Venell
    
    James E. Richards/s/ Sidney A. Huwaldt
    
    /s/ Scott A. FewelSidney A. Huwaldt
    
    Scott A. Fewel/s/ Duane L. Sorensen
    
    /s/ Eric C. ThompsonDuane L. Sorensen
    
    Eric C. Thompson/s/ Michael E. ButlerMichael E. Butler
 63